IndexIQ, a subsidiary of New York Life Investments, has launched a fixed income ETF targeting municipal securities issued by the US State of California.
The State of California is the largest issuer in the municipal bond market.
The IQ MacKay California Municipal Intermediate ETF (MMCA US) has been listed on NYSE Arca and comes to market with $50 million in assets.
The actively managed fund is sub-advised by MacKay Municipal Managers, a division of MacKay Shields, led by co-CIOs John Loffredo and Robert DiMella who have managed municipal strategies together for over 20 years.
The fund aims to provide current income that is exempt from federal and California income tax.
The strategy invests primarily in investment-grade bonds with intermediate remaining maturities, targeting a portfolio duration to worst (a measure of duration that accounts for embedded options) between three and eight years. Up to 20% of the fund may be invested in non-investment-grade securities.
General obligation bonds, revenue bonds, industrial revenue bonds, industrial development bonds, private activity bonds, as well as short-term, tax-exempt obligations such as municipal notes and variable rate demand obligations are all eligible for inclusion.
When selecting securities, Mackay Municipal Managers considers macroeconomic events, technical factors in the municipal market, tax policies, fundamental bottom-up credit research, and risk management.
Scott Sprauer, Portfolio Manager and head of California-focused strategies at MacKay Municipal Managers, commented: “With the increased focus on infrastructure nationally, and the highly fragmented municipal bond market creating inefficiencies and additional risk, it can be challenging for investors to accurately and strategically target municipal bonds. As the largest issuer in the municipal market, the State of California presents attractive opportunities for investors looking for relief from elevated state income taxes. Our active management strategy aims to capitalize on these characteristics and drive greater return potential.”
Salvatore Bruno, Chief Investment Officer at IndexIQ, said: “We are excited to be expanding our municipal bond ETF line-up, building upon our partnership with MacKay Municipal Managers. Investor demand for municipal bond exposure has been increasing steadily over the last few years as advisors and investors search for robust income opportunities amidst uncertainty around inflation and the possibility of rising rates. MMCA is a timely new building block for fixed income investors, made all the more appealing by the power of the active managers behind the strategy.”
The ETF comes with an expense ratio of 0.36% due to a contractual fee waiver in place until at least September 2022. Its gross expense ratio is 0.68%.
As of 28 December, the ETF contained 62 holdings. Its yield has not yet been published. For context, the $1.9bn iShares California Muni Bond ETF (CMF US), the largest California municipal bond ETF, has an average yield to maturity of 0.93%. It tracks the ICE AMT-Free California Municipal Index and has an expense ratio of 0.25%.
IndexIQ offers a further two municipal bond ETFs which are also sub-advised by MacKay Municipal Managers. They comprise the $500m IQ MacKay Municipal Insured ETF (MMIN US), which invests in investment-grade municipal bonds that are covered by insurance policies guaranteeing the payment of principal and interest, and the $270m IQ MacKay Municipal Intermediate ETF (MMIT US), which covers the broad investment-grade municipal bond market. Both ETFs were launched in October 2017 and come with expense ratios of 0.31%.